The Reserve Bank of New Zealand (RBNZ) has moved to lower some capital requirements for the country’s banks, responding to criticism that tougher rules introduced in 2019 were adding to borrowing costs and weighing on the economy.
The changes, announced on Wednesday, follow a formal review launched in March and will apply across the banking sector, which is dominated by Australian-owned lenders. Further details are due in February, with full implementation still not expected until 2028.
The four largest banks will be required to hold common equity tier 1 capital of 12 per cent, down from 16 per cent, under the revised framework. At the same time, tier 2 capital requirements will rise to 3 per cent from 2 per cent, and banks will be required to hold internal loss absorbing capacity of 6 per cent.
For smaller banks, the total capital requirement will be reduced to 14 per cent from 16 per cent. The central bank said the framework would remain “relatively conservative when compared internationally”.
The RBNZ said the revised settings are expected to ease funding pressures across the sector. It estimates the changes will reduce average funding costs by 12 basis points and deliver an annual net benefit of 0.12 per cent of GDP compared with full implementation of the previous rules.
“These new settings will reduce the overall cost of deposit takers’ funding, which we expect to see passed on as benefits to New Zealanders through increased lending and reduced rates,” said Governor Anna Breman.
The original capital framework, announced in 2019, was designed to strengthen financial stability following the global financial crisis, but has faced growing political and industry pushback as interest rates rose.
New Zealand’s banking system is dominated by Westpac, ASB Bank, Bank of New Zealand and ANZ. New Zealand Banking Association chief executive Roger Beaumont said the impact would vary.
“The decision will impact member banks differently given their varying sizes,” he said, adding that banks were reviewing the details.
The Cooperative Bank welcomed the move, saying it recognised the challenges faced by smaller lenders and would support stronger competition.